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Argentina primaries: A promising, market-friendly result

16
August
2017

By Vivienne Taberer, Portfolio Manager

The casual observer could be forgiven for thinking a real election just took place in Argentina. It was, however, just a primary – the elections only take place on 22nd October. But primaries in Argentina are quite unique – all parties take part in the same vote. Thus it provides an important gauge of the political climate in the country – the first true indication since Macri’s election victory in 2015. And the results were a positive surprise for him and investors. Give market weakness over the last few weeks, the result precipitated a strong rally in Argentine assets with the peso rallying 3% on the news and dollar spreads closing 40bps tighter as the market.

Populist ex-president Kirchner underwhelmed:

Polling and market expectations were for Kirchner to win by several percentage points in the Buenos Aires province – the industrial heartland of the country and a key support base for her populist agenda

However, she ended up effectively tied with the Cambiemos candidate (from Macri’s party) on just over 34%

More generally the fragmented Peronist factions across the country fared relatively poorly

Thus there was little from the result to suggest that Kirchner can return as president in 2019

the elections were a symbolic test of support for Macri’s reform agenda and the better than expected result across the provinces were very encouraging – in October it is conceivable they could end up winning the 5 biggest provinces (last achieved by non-Peronists in 1985)

Primary results suggest that Cambiemos should manage to increase their seats in the senate by 8-9, to approx.. 24 (33%) and about 15 in the lower house which would take them over 100 seats.

This would still be well short of a majority, but would nevertheless increase Macri’s credibility, giving him greater clout in negotiations

What next?

Provided the economy continues showing some positive momentum, there is upside to Cambiemos potential in actual election in October

That said, given Argentina’s election rules, Kirchner will almost certainly qualify for a senate seat. This will give her a platform and immunity from prosecution. However, unless we were to see material changes her high rejection rate make it unlikely she could reclaim the presidency in 2019

Conversely, if the result is confirmed in October, Macri will have greater clout in pushing through the next slew of reforms that are required

While there is clear a reform pipeline for after the election, including tax amnesties and labour market reform, much will be dependent on how Macri balances these objectives with his desire to secure a second term for Cambiemos

Current investment views:

We remain constructive on the Argentine peso. The prospect of further reforms and improving fundamentals should underpin investor confidence and keep the currency appreciating in real terms.

Inflation remains stubbornly high and BCRA has kept its benchmark rate elevated (26.25%) as it fights to establish credibility and bring down market inflation expectations. Given the lack of progress on anchoring inflation expectations, we prefer the floating rate notes at present.

We’re positive on the country’s dollar debt – the elections are a credit positive and we should start to see the market pricing in ratings upgrades for later in the year.

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